Trading Market Panic NOW

Dear Friends,
This is my first blog. So a bit of my self introduction first. I'm a physician by training but I love finance. I started my investment career 15 years ago. Initially in the first few years, my investment results were great as everyone knows what the market looked like before 2000. My portfolio contained a full list of high tech stocks and the value of my portfolio kept increasing almost on a daily basis. Then all of you can guess what was the next: The market came to a full stop and crashed almost overnight around 2000. Same as every amateur investor, I hopelessly held my stock positions, begging the market would come back quickly. Of course it was just a mirage. I lost a fortune and sold my stocks at the bottom of the market. Retrospectively, I could have easily been a millionaire if I simply knew when to get into the market, when to take profits and when to stop loss. Rather I did exactly the opposite. What was the root cause? My ignorance of trading and investment! Understanding of this, I started my intensive and extensive self studies. I've spent all my extra time as far as I can to learn, to absorb, and to practice about investment and trading. After 15 years of accumulation of knowledge and experience, I'm very confident that I'm on my way to prosperity. I have many friends who don't know investment very well but would like to learn. Encouraged by their eagerness to learn, I start this blog to share my knowledge and thoughts about the market and investment ideas. Please note, investment and trading is not science but an art. Not only one needs to be armed with knowledge and experience, one also needs a lot of patience and discipline. With this in mind, here is my first idea.

What am I seeing now about the market?  Extreme bullish and complacent! What does that mean? It means almost everyone thinks it is good time to buy stocks and the market will continue to rally. The major stock averages are up about 9-10% since September began. That's a huge rally for such a short period of time.The American Association of Individual Investors (AAII) conducts a market sentiment survey regularly. The extreme bullish level of the sentiment survey is 45% or above. We have stepped into that excessively bullish territory. Over years I have learned that when everyone stands on one side of a boat, it will capsize eventually. It is important to be contrary in investment. Of course my investment/trading decisions are not purely based on sentiment. I also study some technical indicators and charting analysis. Putting everything together, I think the market is at a very dangerous point of crashing, at least a short but severe correction. I'm maybe early but I think it is very close and I'd like to bet on it. So how to trade this market? I'm trading Market Panic. There is an index called VIX, which tracks market volatility. It increases when the market is panic and down and decreases when the market is up and calm. When VIX is at 20 or below, it is at extremely calm territory and almost always snaps back, meaning panic comes back along with the market down. We are at the this level now and VIX is 22.6 today. We can trade VIX with an ETF fund, symbol VXX. It increases with VIX when the market becomes panic and down when the market is up. There are several ways to trade VIX:
(1) Simply buy VXX at current level. It is $16.6 at today's close (Sep 28, 2010)
(2) Buy call option: I like long term options (called LEAP). For tracking purpose, I'd buy Jan 2010 $10 call option, symbol VXX120121C00010000. Today's price is $7.8 per share.
(3) The best way and lowest risk is to sell put option. Again, I would sell Jan 2010 $15 put option at $3.46 (VXX120121P00015000). You will get paid upfront with $3.46 per share.

I know for many of you, option is a mystery and sounds risky. Actually if you know how to trade options, it can be very safe with minimal risk but maximal return. I don't have time to go into details about options, which will be the subjects of my future blogs. I just wanted to get these ideas out first and we can track them over next weeks and months to see if trading panic is a good idea now. Thanks for your patience and interest.